The June 28, 2012 U.S. Supreme Court decision upholding the Patient Protection and Affordable Care Act (“Act”) impacts the life sciences industry in a number of ways, including impacts on innovation and compliance initiatives by medical device, pharmaceutical, and biotechnology companies.

Innovation

A number of provisions in the Act provide incentives and resources for product innovation. First, it is expected that more than 30 million Americans will obtain health care coverage on account of the Act. A bigger pool of Americans with health coverage to pay for treatment will yield growth in pharmaceutical sales and, perhaps, the ability to charge higher drug prices, which, in turn, could spur innovation. In addition, the Act created the Therapeutic Discovery Project Program, through which $1 billion in new therapeutic discovery project grants and tax credits will be awarded. In 2010, 2,923 companies specializing in biotechnology and medical research in 47 states and the District of Columbia received awards under the grant program. Firms can opt to receive either a grant or a tax credit under the program, which allows both profitable companies and start-ups that are not yet profitable to benefit. A third measure in the Act likely to have a positive impact on innovation is a provision that gives biotech companies a dozen years of exclusive rights to the data underpinning their products.

On the other hand, the ruling leaves intact a 2.3% excise tax on medical devices, which is estimated to cost the industry $20 billion over the next 10 years, and which manufacturers fear will burden innovation. On the other hand, some believe that, as in the case of pharmaceutical manufacturers, expansion of health care coverage will increase the demand for medical devices and offset the effect of the tax.

The Supreme Court ruling affects not only the speed but also the direction of life sciences product innovation. PricewaterhouseCoopers[1]has identified five broad pillars of medical technology innovation: financial incentives (such as reimbursement for adoption of new technologies), resources for innovation (such as academic medical centers), a supportive regulatory system, demanding and price-insensitive patients, and a supportive investment community of venture capitalists and other investors. Various provisions in the Act promote the development of more cost-effective ways of delivering care, including a measure that calls for more real-world evidence of a new drug’s superiority over other treatments in order to qualify for reimbursement. Such provisions may spur more definitive product innovation, as opposed to production of “me too” drugs and new devices that make only modest improvements to existing products.

Compliance

Certain provisions in the Act impact compliance initiatives in the life sciences industry. The Act includes “Sunshine Provisions,” which require pharmaceutical and medical device manufacturers to track and report payments and other transfers of value greater than $10 to physicians and teaching hospitals. While under prior laws improper industry-provider relationships primarily were uncovered by whistleblowers and government investigations, the Sunshine Provisions place the onus on life sciences manufacturers to disclose their relationships with providers, for review by others. This enhanced transparency and data accessibility could result in sharper scrutiny by enforcement agencies of information about improper relationships and violations of fraud and abuse laws. Moreover, other provisions in the Act enhance the government’s ability to pursue violations of existing fraud and abuse laws–e.g., revisions to the intent requirement of the Anti-Kickback Statute; and strengthening of fraud enforcement tools through changes to the False Claims Act, civil monetary penalty laws, sentencing guidelines and exclusion authority, and dedication of $250 million for fraud and abuse enforcement. These changes will require life sciences companies to carefully structure and manage relationships with providers, and ensure that their compliance initiatives include efficient and effective operating procedures for tracking and reporting payments, educating and training sales and research personnel, and auditing and monitoring provider relationships.